What’s Taleb telling me to invest in

In case it’s not outright obvious, I’m a huge fan of Taleb’s writing, even though he’s only gotten a few pages worth of actual ideas, intermixed with stories to make them stick, they are probably the best ideas.

I’m half certain I owe part of my career, my current (travelling) lifestyle and a few moments when I was almost idiotic enough to lose a large amount of money but didn’t, to him. And for better or worst I’ve taken a fooled by randomness inspired approach in absorbing expert knowledge in other fields, specifically CS and machine learning, and thus far it seems to work.

Taleb is an insane narcissist, but he does take his own advice and projects this personality from atop a pile of money taken from his detractors. However I never really figured out how Taleb would recommend I invest my money.

I get that he’d suggest having a small % of my capital tied up in risky investments that (I think) have the possibility of booming as a result of various hard or impossible to mathematically model events. That’s the part that he and anyone else who reads him seems to keep yammering on about.

But that small part of my money is only like 5, 10 maybe 20%. And almost by definition, I’m likely to be unlucky, or a sucker, or both, and lose it, or at least never get much of a return from it. My real question is “how do I invest the 90% !?”.

The FIRE (financial independence and early retirement) approach here, is one that tries to replicate what large investment-focused entities are doing to ensure safety. This means investing in ETFs covering large swaths of blue chips, ETFs covering government bonds, and at the extreme things like franks, T bills and swiss bonds. Indeed, Taleb gives treasury bonds as an example of the safest possible class of assets.

This never sat right with me, the idea of taking a “very secure” index fund and investing all my money in it feels crazy, and spreading it among 10 index funds seems feels equally bad, no matter the indexes.

The argument for investing in T-bills is something like “yeah, maybe they aren’t fully secure, but if these go bust or get too inflated then next up the bombs start falling, so why does that possibility even matter”. Equally so, the argument for investing in blue chips is that the good ones (mainly German, Chinese and American) are essentially government-subsidized/owned and will be bailed out of any crisis, and if that doesn’t happen, or if the “quantitative easing” leads to everyone switching to crypto or some other currency, then, again, that’s when the bombs start falling and money losses value.

But, let’s say for a moment that I buy the hypothesis here in a broad sense, where there is a set of financial instruments underpinning our whole economy, and if something happens to them things go disastrously wrong and I should forget about money. How do I know which instruments these are?

I’m certain that for Taleb this is obvious, I’m certain that for many hedge fund managers this is obvious. But these are people that suckled on golden pacifiers when they were kids, people with hundreds of connections in the banking & governing & money-printing apparatus. What seems obvious to them may not be obvious to anyone else.

And, by Taleb’s own logic of skin in the game, there would be little interest for anyone to reveal such a strategy. Even more importantly, the “safe” strategy might be ever-changing and might change based on subtle hints that one doesn’t easily get unless they were born in a position where they have all those buddies in the banking & governing & money-printing apparatus.

By this, I don’t mean to imply that there’s a covert cabal of people that meet up every Wednesday to hold weird sex parties eyes-wide-shut style and create covert financial instruments in between the orgies. More like, well, the experts in any field. They hang out with other experts, they have shaped their mind to that field for half their lives or more, they get pinged by their expert friends about interesting happenings, papers and interesting conferences, they have more time to read this interesting stuff and can do it faster, since they know the lingo and can quickly disqualify low quality work that was published as career filler for the author.

What Taleb rightfully points out is that experts that are good at this must have skin in the game and that most economists don’t have skin in the game when it comes to the market (and a hideous track record to top this up). But there is a group of people that does, one that Taleb happens to be part of, rich people. And by being born rich someone like Taleb unconsciously becomes a market expert. Not enough to give him an edge, no, that’s something he gets the full credit for. But enough to be able to have his money grow by the standard 3-4% every year on average.

But it’s unclear to me why this default ability to know what the “safe” equities are at any time would be available to the non-wealthy. Again, this is not to say they can’t learn it, but they haven’t been groomed for 20+ years for the task, and they aren’t in an environment where the relevant information is hand-feed to them by virtue of socialising. It may be that the FIRE-type people are 90% right in their investment strategy, but they are missing a thing that is “obvious” to someone with the correct expertise, and that makes their bond portfolio extremely unsafe in certain situations where it would “obviously” look so, or it makes them include a specific bond category that “everyone knows to be very bad”, or whatever.

The point here, to link this back to black swans, is that I can’t quantify risk when it comes to “safe” investments, so to me they look unsafe. I don’t “get” how e.g. any bonds are safe when it looks like almost all countries that issued “prime” bonds seems to have had a debt crisis that made those bonds close to worthless in the last 200 years, and the 1 or 2 that didn’t could be considered random chance. And I don’t get how bond ETFs are safe when a lot of these crises seem cumulative. And I’m assured by all sort of people that they have complex mathematical models showing this to be true, but that seems to be exactly the kind of thing I should be wary of in a Talebian universe, people giving me advice with no skin in the game.

On the other hand, don’t I have at least some advantages as part of the peasantry when it comes to “safe” investing? One important advantage is the ability to turn “liabilities” into “assets” by using them and thus preserving value.

This is not something that’s outside the bounds of the wealthy, but they can’t push it that far. A peasant might have 10k, 100k, 200k, maybe 500k worth of savings. All this money can be sunk in useable goods (e.g. a nice house in a place safe from climate change, a somewhat older car that’s already appreciating in value, which can be retrofitted with modern features, a custom shop guitar). You can buy items which are ends in of themselves, and by virtue of that property you get to use & maintain them, thus their value will likely appreciate.

Aristocrats can also do this, but unlike the poor, they can’t have 90% of their savings be part of such assets.

Another thing that strikes me as interesting, is that peasants have much less to lose in a sense, and have much less to care for since there isn’t an implicit expectation of preserving a family fortune over generations. Starts to smell like war? Plane ticket to the other side of the world. Got in a slump, income streams dried up, saving running out? Reread Seneca, pull the buckle tight, start looking for a few gigs. Revolutions come about, they’ve got nothing on you, you’re poor as dirt, you don’t live in the fancy quarter. Religious persecution kicks in? Good thing you’re family history is < 2 generations old. Stock market crashes? Doesn’t matter you are living paycheck to paycheck and most companies are small private ventures that will keep chugging along just fine. Money devalues? That’s ok, all our friends also own money, 90% of all people also own money, so prices are bound to come down and you are over-saturated with material wealth anyway, what you care about is a subconscious stupid idea of status, and if everyone is losing money everyone’s status remains intact.

In Taleb’s world, being poor is antifragile, in a way that being rich isn’t. Of course, someone who is rich can choose to migrate to being poor, but that’s like asking them to destroy their whole notion of self, lose all their friends and all of their meaning in life, be it conscious or subconscious. So instead you’ve got people like Taleb, which by his own account suffered greatly and risked his life in a war-torn Lebanon while hundreds of thousands of poor people got to emigrate to Europe and the US where they live cushy lives.

To put it more plainly, the whole “invest in X because if it falls then the bombs fall” is an issue if you live somewhere that will be bombed, somewhere like New York, or London, an important military, political or economic centre. i.e. a place that’s expensive, dirty, unsafe, polluted. A place where the aristocrats have to live, but not the peasants. The peasants can be, e.g, on a small 20k people tropical Island in the middle of nowhere, which is at about 0 risk of getting nuked, and agriculturally self-sufficient, where a world war might go unregistered but for the news.

So maybe the whole “90% of the money in safe instruments” doesn’t quite apply to the peasants the same way it does to the aristocrats, maybe the 90% should instead be invested into owning a home in a favourable place in the world, held in assets which are “safe” by virtue of the “if they fall then my world falls apart one way or another” as far as this applies to you (e.g. fiat currency), invested towards personal care that will make you more antifragile (speaking more languages, being physically fitter, understanding the world more… etc) and so on.

The point here is not to say that “X” is the thing that one should invest their money into, obviously the distinction I make here between rich/poor, peasant/aristocracy… etc is superficial, but it’s meant to illustrate this broader point that “invest 90% of your capital in safe assets” might actually mean that said 90% of the capital should not be in the market at all for some people, and that “safe” is a very subjective term that depends on how you can react to various weird events.

I’m not sure I “get” how Taleb would want me to invest my money if he were my economic advisor because I don’t think he’d have any idea either. That’s his point, he’s an empiricist, and when it comes to me I have the best observations out of anyone to figure out my own cost/benefit matrix. But I’m fairly sure he’d agree that I’d be a sucker to put it all into the stock market and consider it "safe", given that most people born in my economic circumstances that thought they "understood" the market ended up getting fucked out of their pension funds one way or another, be them American, Swiss, Greek or German.

Published on: 2021-04-12



twitter logo
Share this article on twitter
 linkedin logo
Share this article on linkedin
Fb logo
Share this article on facebook